introduction to Cost Control_Conceptual Stage

Lecture 6-1CE-591 Cost Engineering and Control

Dr. Farrukh Arif, Assistant Professor, NED UET

CE-591- Cost Engineering and Control

INTRODUCTION TO COST CONTROL



OUTLINE� Basic Responsibilities of Project Management� Objectives of Cost Control Program� Cost Reporting vs. Cost Control � Elements of Cost Control System� The Control Estimate� Project Change Orders� The Need for Written Procedures� Types of Contracts� Who Controls Costs?� What the CE does?� Role of Owner’s vs. Contractor’s CE� Cost Control in Project Phases� Interface between Cost Control and Other Engineering Functions. � Example of Cost Control � What is needed for Effective Cost Control?� Summary



Basic Responsibilities of Project Management� Quality Control

− Adhering to the owner’s quality standards.− constructed facility should work safely for specified years.

� Schedule Control−Complete in specified time.

� Cost Control − Completed within budget.− Owner can realize his expected profits.− and Keep financial requirements within anticipated limits.

� Safety − Construct Safely.− Good safety record can yield cost benefits (reduced insurance, improved productivity).

� Minimize Disruptions to Existing Operations−In case of addition or modification of existing facility, special arrangements required for minimizing disruptions. −Can impact cost and schedule.



Objectives of Cost Control Program

� To focus management attention on potential cost trouble spots in time.

� To keep project supervisors informed.− regarding budget available for their area of responsibility. − comparison of expenditure performance to available budget.

� Create cost-conscious atmosphere.� Minimize project cost.

−Through cost reduction. −Value engineering (may be).



Cost Reporting vs. Cost Control

� Cost Reporting − Monthly cost reports− expenditures vs. initial estimate comparison

� Cost Control − Forecasting cost trouble spots− determine corrective action



Elements of Cost Control System

� Know what has to be done?

−Have good financial and time yard sticks to measure performance and progress.

� Know what has been done?

−Knowing and keeping all project and schedule commitments updated.

� Know what remains to be done?

−Forecasting.

� Know what is wrong early and why?

−Compare analyze and identify cost or schedule deviations. Compare the forecast to this.

� Take corrective action.

−Isolate points of overruns and take corrective actions.



The Control Estimate

� Detailed prediction of the project execution plan.

� Schedule details.� Economic and Physical conditions.� Must be detailed enough to be able to

measure performance on item-by-item basis.



Project Change Orders

� Changes during engineering/construction projects are necessary.

� Control estimate should be modified according to changes through formal change order system

−Proper documentation on special forms−Formal approvals

� Change order system and control estimates should be linked.



The Need for Written Procedures

� Objectives:−To establish clear-cut cost responsibilities

−To establish proper/formal lines of communication

� The procedures should cover all aspects of cost control including methods of preparing or handling following:

−Tabulations of fabricator’s bids and comparison with budget.

−Approval of commitments.

−Project change orders.

−Forecasts of cost to project Completion.

−Disseminating cost information to all concerned.

−Format for tabulating, forecasting, and reporting project commitments.



Types of Contracts

� Lump Sum� Guaranteed Maximum Price� Unit Price� Cost Plus� Cost-Reimbursable Alternative

−Fully reimbursable with fixed fee.−Fully reimbursable with a fixed target cost and mutual sharing of any under run to the target cost. −cost-reimbursable plus performance-based incentives−direct cost-reimbursable plus fixed construction management costs.



Who Controls Costs?

� Contractor− One of prime responsibility.− “doing the spending”.

� Owner− Direct responsibility for basic design specifications.− Changes made during execution.− Monitor and appraise contractor’s cost control efforts.



What the CE Does?

� Provides information.� Points out areas of cost overruns. � Investigate and recommend corrective action. � Forecast and prepare complete project monthly cost

outlook.� Monitors costs between outlooks. � Keeps complete record. � Quick cost estimates for alternatives.� Sends information back to main office for record keeping

for future.



Role of Owner’s CE

� Appraise contractor’s cost control performance.� Report/Analyze trends of costs outside

contractor’s Scope. � Respond to management’s cost related requests. � Interpret owner’s estimate� Review contractor’s change orders. � Administer cost incentive plan (if any).



Role of Contractor’s CE

� Implementation and execution of cost control plan.

� Follow written guidelines or subsequent agreements.

� Maintain close, but, formal working relationship with owner’s CE.

� Avoid conflicts between contractor and owner by resolving confusions and misunderstandings.



Cost Control in Project Phases

� Although Cost engineers and estimators have a key role in the early planning phases, formal cost control programs is considered in the final three phases.

−Cost control during conceptual engineering. −Cost control during detailed engineering. −Cost control during construction.



Interface between Cost Control and Other Engineering Functions



Example of Cost Control

� The technique used includes following five steps:1. Comparison: Locates the problem.2. Forecast: Predicts magnitude of the problem. 3. Analysis: Determines reason for the problem. 4. Corrective action: Selects a lower cost alternative. 5. Revised forecast: Reflects impact of the corrective

action on project costs.



What is needed for Effective Cost Control?

� Management attitude that emphasizes cost control.

� Cost-conscious design/construction team. � Capable cost control organization. � Full-time cost follow-up. � Good cost tools. � Comprehensive written procedures that

formalize the approach to cost control.



3Ds of Good Cost Control

� Definition− Well-defined project.

− Definition must be reflected in control estimate and schedule.

� Documentation− Decisions, change orders, commitments, contracts, procedures.

� Discipline − Explicit project procedures must be followed.

− Project must not fall in “Tomorrow Syndrome”

−Eg.: “Change drawings now, we will work out costs tomorrow.”



Summary

� Focal point of cost control program: CE � Main tool: control estimate� Main approach: analyze existing trends and

forecast total cost. � Pay attention to 3 Ds. � “All costs are controllable.”



CE-591-Cost Engineering and Control

COST CONTROL DURING CONCEPTUAL ENGINEERING



Outline

� Introduction

� Types of Cost Estimates

� Blackout Periods

� Cost Monitoring

� Changes to Estimate Basis

� Yardsticks

� Cost Monitoring during Conceptual Phase

� Cost-Monitoring Committee−Flow of Information − Committee Reports Outline

� Controlling the Cost of Conceptual Engineering

� Summary



Introduction

� Cost control begins in the owner’s office during planning and conceptual phases.

� Theoretical minimum cost of project is set.

� Greatest opportunity for cost savings.

� Design basis are set.



Types of Cost Estimatesw.r.t. project phases

� Screening Studies− Early estimates to compare competitive processes/alternatives

� Preliminary Estimates− Used as preliminary economics

� Semi-detailed Estimates− Prepared near end of conceptual engineering

−Owners use to allocate funds for projects

� Definitive Estimates− Prepared as early as possible during detailed engineering

− Used as basis for cost control.



Blackout Periods



Cost Monitoring

� Eliminate cost blackout periods.� Provide a continuous evaluation of

total project costs� Take corrective action to minimize cost

increases.� Provide economic yardstick.



Changes to Estimate Basis� Many changes to the basis of the preliminary estimate are made during

conceptual engineering. � Operational

− All changes that are absolutely necessary for the operation of end product.

� Safety− Changes necessary from safety aspect (structural design changes, user related safety etc.)

� Intangible Benefits− Changes that are desirable but have intangible benefits only (elaborate landscaping, impressive entrance gate.)

� Uncontrollable Changes− Changes outside of management control (changes in law, increased taxes.)

� Economic− Majority of changes fall in this group.

− Justification for such changes should be in form of tangible payout.

− Increase quantity or improved quality.

− Reduce maintenance cost of labor or materials.

− Reduce operating costs.



Yardstick for Justifying Economic Changes

� Recognized method of calculating profitability that tales time value of money into account.

� One common yardstick is “discounted cash flow.” � For small changes “payout time in years”� Payout time in years = investment

annual savings� Acceptable = 2 years (generally) i.e. any change

that did not return investment will be rejected.



Cost Monitoring during Conceptual Phase

Project Personal Responsibility

Planner/designer identifies changes w.r.t. basis of original estimates and advises CE.

Project Manager (PM) Advises the CE of changes in project timing or execution plans.

Cost Engineering group Keeps track on changes in material or wage rates.

Cost Engineer (CE) Develops cost and schedule impact of each change. advises cost control committee.



Cost-Monitoring Committee

� Members−The Lead Planner/Designer

−Technical Specialists

−Project Manager

−Project CE

� Duties−Review Plans

−Question any “client” requirements that appear to cost an exorbitant amount.

−Define economic yardsticks.

−Put out periodic reports.




Flow of information




Committee Report Sections� Narrative Section Covering

− Schedule outlook.− Highlights of progress made.− Brief resume of activities.

� Project Cost summary� List of approved changes� Cost history of project



Project Cost Summary



Approved Changes



Project Cost Outlook History



Controlling the Cost of Conceptual Engineering

� Direct Project costs −Material − Labor

� Cost of Conceptual engineering − Salaries of specialists and managers − Overheads− 50,000 to 150,000 work hours are required in general.



Summary

� Keep cost outlook current. � Prevent blackout periods. � Focus on items having potential for

large cost impacts. � Economic Yardsticks.� Cost Control Committee and report.

Documents

introduction to Cost Control_Conceptual Stage